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06/01/2008

The Cost of Infrastructure Deterioration--Posner

The term "infrastructure" is much used but lacks a clear definition. I shall use it to mean inputs, often provided by government rather than private enterprise, into a very large variety of products and services. Good examples are transportation, communications (including the Internet), education, the environment (including water resources), public health (in the sense of prevention of communicable diseases), and law enforcement (including the judiciary). Current concerns with our allegedly deteriorating infrastructure focus on road and air transportation and on primary and secondary education, and I shall confine my discussion to them.
I am going to bracket road transportation and education because the problems of both could probably be solved satisfactorily by privatization or, in the case of education, semi-privatization. Air transportation I discuss separately because its problems almost certainly require a governmental solution.
America's roads (including bridges, which carry mainly roads) have been deteriorating, as is obvious to any user of the interstate highway system. The reason for the deterioration is that the system is carrying vastly more traffic than it was designed for in the 1950s. The result is not only rough surfaces which wear out tires and slow down traffic, but also delays due both to construction and to the sheer increase in traffic volume. Congestion and therefore potholes and delay have also increased on local and commuter roads.
Wear and tear, and delay, are real costs, but the costs of road building and road improving to reduce the costs of wear and tear and of delay are real too, and the challenge is to spend only up to the point where the last dollar spent yields a dollar in benefit. Government seems incapable of doing that. Privatization should be able to. This is obvious in the case of toll roads, where in fact a privatization movement is under way, as we have discussed in a prior post. The toll can be set equal to the cost that a vehicle imposes on the road in congestion and wear and tear. (That cost varies with the size and weight of the vehicle, but the toll can be made to vary with these factors as well.)
There is a concern about monopoly; there are not always good alternatives to a particular route. If the state or other public owner of the toll road auctions the road to the highest bidder, the winning bid will capitalize monopoly rents, and the tolls will therefore contain a monopoly markup. That is inefficient, but the revenue that the state obtains from the auction is a tax substitute, and taxes have the same general misallocative effects as monopoly prices. The state can if it wish avoid the monopoly problem by specifying a minimum quality of service and then auctioning the road to the lowest bidder who agrees to provide that quality.
Not all roads are toll roads, but given modern technology all can be made toll roads. Electronic toll systems are available that do not require vehicles to slow down, and these can be adapted even to local roads, so that the entire street system of a city or an entire metropolitan area could be privatized. This may seem a bizarre suggestion, but it is no more bizarre that allowing a private company to own the telephone or cable grid of a city. The street system is just another grid, and the potential monopoly problems can be dealt with in the same way that cities deal with telephone or cable monopolies, where auctioning franchises may again be the most efficient approach.
The American system of public education is heavily criticized. Costs per pupil are high relative both to private education and to public education in foreign countries that turn out better students. Many parents are voting with their feet, as it were, by putting their kids in private (including parochial) schools, home schooling the kids, or moving to communities that have better public schools. These are alternatives are costly to parents. It is not clear why government is in the business of operating any educational facilities. It is appropriate for government to require that children attend school up to a specified age, to fix minimum educational standards with regard both to curriculum and to performance, and to finance the costs of education for impecunious parents. None of these things requires that government own and operate schools. But public education is not about to be abandoned, and it could be semi-privatized by adoption of a voucher system, which by permitting parents to choose among public schools would force public schools to compete with each other.
Air transportation presents a baffling problem in infrastructure deterioration. The deterioration in airline service in the last five years has been dramatic, involving as it does not only extraordinary delays but also horribly crowded airplanes and crummy airports. The delays are masked by the fact that the airlines have increased the scheduled time of flights and by the difficulty of measuring delay resulting from canceled flights and missed connecting flights. A study this past month by the majority staff of the Joint Economic Committee of Congress entitled "Your Flight Has Been Delayed Again" estimates the annual cost of airline delay at some $41 billion. Of this amount $12 billion is attributed to traveler time costs. That estimate strikes me as too low. It includes the delay due to schedule change, but excludes delays due to missing connecting flights, to canceled flights, and to lost time when in order to avoid missing an appointment one has to take an earlier flight and hence if it is not delayed has dead time on arrival. The uncertainties of air travel also cause some potential travelers to substitute, at some cost, another activity (maybe even another job, requiring less travel). On the other hand, the $41 billion figure is misleading because it is the cost of total air transportation delay, not avoidable delay; optimal delay is not zero, because of unavoidable weather conditions and equipment failures.
The deterioration in airline service is puzzling because the high cost of aviation fuel has virtually bankrupted much of the industry, and so one would expect a contraction; this is beginning yet there is no expectation that flight delays will diminish. The reason is that the airline industry has very heavy fixed costs, so that even when high fuel prices push up its marginal costs, each flight, provided the revenue from the flight exceeds the marginal cost of the flight, will contribute something to the airline's fixed costs, and so airlines are reluctant to reduce the number of their flights. This explains, moreover, why airline service has deteriorated. When demand grows, as it has done rapidly in recent years, the industry responds by adding flights. No airline has an incentive to balance the revenue from additional flights against the costs in additional delay, because one airline's reducing the number of its flights would have little effect on delay, but a dramatic negative effect on its revenues.
One culprit in the deterioration of airline service is Congress, and another is the Administration; between them, they have failed to create a modern air traffic control system that would reduce delay by reducing the safety-required spacing of planes both on the runway and in the air. But that would not solve the basic problem, which as I have said arises from the fact that no individual airline bears the full costs of the delays it creates. The airways are like a highway of fixed size with no tolls, facing an increase in traffic.
Another apparent culprit is the airports, but they are in much the same position as the airlines. They are locally owned and in principle (but not in practice) can control congestion by limiting the number of takeoffs and landings either directly or by fees. If every city had two airports, if most airline traffic were between just two cities, and if two companies each owned one airport in each city, then the competitive situation would be identical to that of two competing toll roads, and, assuming a modern air traffic control system, the optimal amount of delay would be achieved. But these conditions are not satisfied. No single airport can optimize congestion, because it does not control the traffic to and from, and hence delay at, other airports, and that delay will in turn cause delay at its airport.
The best solution might be a federal airplane congestion tax that would vary from route to route depending on delays, which vary considerable across regions and specific airports. The revenues could be used to update the air traffic control system. An alternative might be to allow some limited collusion among the airlines, enabling each airline to reduce the number of flights without losing business to its competitors. But that would be in essence a return to the system of airline regulation prior to the abolition of the Civil Aeronautics Board, and that was a thoroughly unsatisfactory system.

Comments

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Dan, well, quite a bit to respond to here:

Jack
You want to maintain a system that increases pollution, causes huge congestion problems and lost productivity, etc because you think that rich and poor should be trapped together in the vast traffic jams?

............. geez Dan I thought my post clearly pointed out that if a toll road (for the elite?) parallels a non-toll road that those avoiding the toll will over-crowd that road while the toll road will be underutilized with the result being less, not more throughput.

I suppose you could make a case that, but for the toll the road for the elite would not be built and begin pumping profits to the Middle Easterners and others who own the vast majority of America's toll roads, however, I do have to admit to a bias favoring public ownership of most of our roads and highways.

I am open to a compromise though, as I'm virtually sure the 18.4 cents per gallon is far too little to maintain and build our highways and should have been raised long ago. I submit our estimated $1.7 trillion of delayed maintenance as support for my position.

Your desire for equity is a bit out of whack with reality and in the end helps neither group.

.......... Whose "reality?" But yes, in the matter of roads and other public infrastructure I do lean very acutely in the direction of equitable access and have a strong belief that free access to libraries, K-12 schools, and our roads and highways has benefited us far more than it has cost. Was my mention of $60/mo being a significant burden on those whose wages have not increased in 25 years lost on you?

We need to allocate a scarce resource without creating market distortions with unintended consequences.

........... Agreed, the moving out to the 'burbs and having free roads built has been a bit too easy.

For some reason, perhaps a lack of acceptance that fossil fuels were "cheap" or in infinite supply, long before the last oil crisis, I was sure that shifting some of our tax burden from income to all non-renewable resources would have been a wise move. It seemed a particularly good idea when Pres Clinton proposed a BTU tax at a time of low oil prices and a dire need for additional revenue to attempt to balance a budget that was so long out of balance. As both of us appreciate the power of the market, just think of the effect those billions of small decisions based upon slightly higher fuel costs would have tallied up to over the last 16 years.

Treating resources with respect and pricing them to reflect their true costs leads to the most productive use of those resources. That benefits everyone in society.

............ agreed! And as mentioned before, I guess we've embraced artificially low fossil fuel prices due to a combination of powerful auto and oil lobbyists and the adolescent nature of our citizenry that refuses to take a healing pill if it's bitter?

BTW why are wages in New York higher then wages in Des Moines, even for low level jobs?

............ this one could be quite a topic in itself! The answers could range from NY having a much higher GDP per capita on to union solidarity in NY, and while min wages or low end wages don't cover even the most minimum std of living anywhere in the nation, the token wages paid in NY would have to be at least a bit higher so that, combined with a whole alphabet of transfer payment schemes they guy and his family is not living on the street.

Land prices do reflect proximity to amenities that potential buyers favor. If people in a community favor proximity to public transportation land prices will reflect this. Builders build where people want to locate.

......... Indeed! and many of the 20 million, energy wasting homes, built over the last decade were built OUT where folks could afford them. Next? more "freeways" so they could get to work.

Home buyers may not have a perfect vision of the future, but they are as aware of future trends as the politicians who would do any central planning.

.......... I generally agree, if as you indicate the pricing is accurate. And while pols may not be able to see much of the future, I've been predicting the current oil mess since we got through the last one at 30% dependent, and have watched as the dial went to over 60% dependent. As a free enterprise guy, what sort of CEO would sit by and let himself become that dependent on a few suppliers for his MOST important raw material?

I do favor zoning regulations but that goes beyond what I have the time to discuss.

.......... GREAT! Had you not favored zoning we'd have to ask you to make a trip to Houston! It's not uniformly ugly, but its lack of zoning and apparently "market based" spacing of billboards, coupled with air that challenges the LA basin for worst in the nation each year surely makes it a contender for any ugly award!

Jack
Why would the toll road be underutilized? The idea is very simple. You pay a fee for use or you keep the road free and pay in congestion and lost time. People are free to chose their path.

Monopolies do charge higher prices and reduce output but in the case of roads this may be better then the current system. Currently road construction and maintenance is a political process full of failures which you and others bemoan. Just giving politicians even more money to spend on roads hardly makes sense.

Will traffic increase on secondary roads? Yes, but as Judge Posner writes the technology exists to charge tolls on secondary roads and this could be easily done in highly congested areas.

I have no idea why you think a fuel tax increase is a better idea. For politicians it has the advantage of being widely spread, but such a tax would be far less effective then tolls. Your tax system encourages the building or roads to nowhere. Tolls encourage the prudent use of roads.

You call for equity in the use of public goods (with a very broad definition for public goods) but then you want to increase taxes on all without regard to how much they may directly use this public good. (You increase the fuel tax for a single mother in Iowa to rebuild roads in New York City.) Or do you want to add yet another level of complexity to our tax codes? The logic, and the equity, escapes me.

If you think owning roads is profitable why do you assume that non-US firms will dominate in their ownership? And why use this for what sounds like an anti-Arab rant?

I don't see the value of a BTU tax that would just be used by politicians on wasteful spending.

What does artificially low fossil fuel prices mean? I have no idea what that means or what you are talking about. The price was what the price was. As the price goes up, alternatives become attractive. That is how markets work.

The per mile cost of building in rural areas is many multiples less then in urban areas. The construction of public transportation makes little sense for most of the communities in this country.

The spread to the suburbs made sense. Many people have little desire to live in highly congested densely populated urban areas. These people don't need a sermon from others. Nor should they fail to be aware that they need to pay for resources that they use.

DanC:
Why would the toll road be underutilized? The idea is very simple. You pay a fee for use or you keep the road free and pay in congestion and lost time. People are free to chose their path.

........... exactly. So those for whom the $60 is a problem will opt to take their chances on the "free" path. WERE both paths "free" traffic would favor the most convenient for their purposes.

Monopolies do charge higher prices and reduce output but in the case of roads this may be better then the current system. Currently road construction and maintenance is a political process full of failures which you and others bemoan. Just giving politicians even more money to spend on roads hardly makes sense.

aaaaaaaaa hmmm Let's see the worst example may be The Big Dig, right in the center of Boston and that has come in at a bit over twice the estimates of 15 years ago. Politically speaking my guess is that Haliburton and Enron have done quite a bit of damage to the idea that "privatization" saves a lot of money and avoids political corruption.

Will traffic increase on secondary roads? Yes, but as Judge Posner writes the technology exists to charge tolls on secondary roads and this could be easily done in highly congested areas.

aaaaaaaaaa If he favors a sort of Libertarian approach of tolls as soon as one leaves their driveway, I'd rather see an increase in gas taxes. Why? because it pays the same for the roads, but also rewards those who opt for more efficient and less polluting vehicles. If he favors tolls here and there, the problem in urban areas is that of some getting clobbered regularly while others pay rarely. No sale so far!

I have no idea why you think a fuel tax increase is a better idea. For politicians it has the advantage of being widely spread, but such a tax would be far less effective then tolls. Your tax system encourages the building or roads to nowhere. Tolls encourage the prudent use of roads.

aaaaaaaaaaa I've LONG favored fuel taxes that go beyond just filling up the transportation fund. It would be fairly simple to design a fuel or BTU tax that was generally overall tax neutral. Your fellow Krauthammer has a good editorial in the papers today patting himself on the back for favoring exactly the kind of tax I've long favored as early as 20 years ago. (I'm a bit quicker study and can claim 40 years!)

You call for equity in the use of public goods (with a very broad definition for public goods) but then you want to increase taxes on all without regard to how much they may directly use this public good. (You increase the fuel tax for a single mother in Iowa to rebuild roads in New York City.) Or do you want to add yet another level of complexity to our tax codes? The logic, and the equity, escapes me.

aaaaaaaaaaa Neither Posner's elitist system nor my shifting of income tax burden to non-renewable resources can benefit ALL. Also, I'm not a purist; there may be situations where a toll would be the best situation. Being from Anchorage, I'll also freely grant you that we probably do need a lot better feasibility "studies" than that of seniority on the Transportation Cmte; as the billions earmarked for the "bridges to nowhere" PLUS a the very stiff tolls proposed did not create a viable project. But! neither they nor his other road for a fund raising pal down in Florida are going to be built and there is a very good chance that he'll lose the seat he's held for 35 years for his lack of judgment; perhaps the system "works" albeit in some clumsy way.

If you think owning roads is profitable why do you assume that non-US firms will dominate in their ownership? And why use this for what sounds like an anti-Arab rant?

aaaaaaaaaaaa Good question, and though I'm not an expert by a long shot, I suppose it's because of the pile of "hot money" building up around the world due to our recent history of running half trillion trade deficits year after year.

"America" in essence is selling off its assets and what are the to do with the pile of increasingly worthless dollars? With lots of help from our hotshot Wall Street brokers buying our roads and jacking up the tolls might be their best shot. Us? We'll be digging out from under the mortgage melt-down, though with our bonds selling at next to a zero post-inflation cost, it does seem there is capital for worthy projects.

Overall my guess is that once you've a mix of M&A thieves mingling with state politicians to sell of their roads and build others that the amount graft and corruption of today would be a fond memory compared to the wholesale rip-offs where public purse meets private greed.
ttp://www.time.com/time/magazine/article/0,9171,1673288,00.html

I don't see the value of a BTU tax that would just be used by politicians on wasteful spending.

hhmmm Is ideology blinding you a bit? "MY" BTU tax (as Krauthammers) would lessen the income tax burden. For some reason, I don't think our income tax was designed by our founders or by the hand of god, and is far from perfect. You might consider its market distortive effects: Say a brick layer lived near a carpenter, both were building new homes. Ideally they'd trade their expertise, but! with the transaction cost of the income tax both may end up being "do-it-your-selfers" with a loss of efficiency and perhaps a poorer final product.

What does artificially low fossil fuel prices mean? I have no idea what that means or what you are talking about. The price was what the price was.

aaaaaaaaaa Aahh! well you're finding out now; right? "IF" one believes what they or "the market" are telling us the finding of the next, marginal bbl of oil, has, all of a sudden, risen from $20 to over $130.

As the price goes up, alternatives become attractive. That is how markets work.

aaaaaaaaaaaa You really should read Krauthammer's article of today's papers. He makes a case that it's $4 when America's consumer revolts and can't take it any more, pointing out that we ARE finally reducing consumption in a situation where it's not simple to reduce. Sez he, (and me) HAD we implemented a gradual increase in fuel taxes when the combined tax and underlying price totaled $4 WE would be putting a buck or so in OUR Treasury not those of the OPEC cartel.

(BTW you have asked ME a lot of questions that indicate you've a great belief in free markets, as have I, but I wonder why OPEC which apparently includes Cdn, Mexico, SA, and my home state of Alaska are referred to as a "cartel" in which all sell at the same price? I know for a fact that AK oil is profitable at $20 and can not for the life of me think of ANY commodity that sells at such multiples of production costs. Thanks to all though as Alaskans WERE facing the dreaded income tax!)

The per mile cost of building in rural areas is many multiples less then in urban areas.

aaaaaaaaaaa typically true but the miles per resident still adds to a lot.

The construction of public transportation makes little sense for most of the communities in this country.

aaaaaaaaa As a blanket statement probably I'd agree, and especially so if you mean old fashioned subways and buses. I mentioned here the need to open reform our cab laws to allow "jitneys" or even more cabs... $400k for the right to pick up passengers in a car in traffic gridlocked NY??

If these oil prices stick we'll soon be building light, fast rail at "catch up" speed! And why not? since they use so little fuel and space is not the premium it is in the air an alternative to flying from LA to SF is surely that of riding in a comfortable cafe setting where computer and cell phone worked for the whole trip and the station was in SF proper instead of a long costly cab ride away.

The spread to the suburbs made sense. Many people have little desire to live in highly congested densely populated urban areas.

hhmmmmm, And you're the advocate of accurate pricing? When I was zipping over 100 miles per day on the Santa Monica freeway for .30 per gallon who was paying for my "freeway?"

These people don't need a sermon from others. Nor should they fail to be aware that they need to pay for resources that they use.

aaaaaaaaaaa Indeed. And I'm not sure just what fraction of that $1.7 trillion in delayed maintenance is roads and bridges, but its existence is surely a signal that 18.4 cents is not the right number for the federal gas tax.

I can't believe I'm quoting and agreeing with Krauthammer, but here's the link!

I always like to weigh in...if I died tomorrow being a 'fact' of this blog would be one of the top 10 things of which I am proud...I mean come on, reading Judge Posner is better than Jackie Collins or Oprah in my book...b/c of JP I know about the NNDB which tracks the entire world (put in RAP's name and have a ball with the maps that surface)...basically no one has any respect for much of anything... we drive like idiots stuffing our faces with fast food, flippin' a fag with another hand, digging for the cell with a yet ungrown third hand, all the while our heart is racing, our arteries are clogged and our souls are empty. I like infrastructure failure due to psychological failure ... the structural engineers have been telling us for many years that the guts of our country were sick. Why are we spending trillions in other countries when we can't get our own interior in order or run our elections ethically? Ah, meditation is in order. Thanks JP and GB. PS I saw President Bush award Professor Becker. It made me sad to think you two are, dare we say it, aging. What does Ken Posner do? I just watched Eric on Blogging Heads...

One of the problems I see with privatization of the road system is tax. One would expect that the privatization of the road system would experience shift in income burden. That is as the tolls are put in place the millage burden of taxation from the legacy govt providers is reduced or eliminated.

However that is not occurring at least here in texas. Austin which has one of the most extensive toll systems in the state has had the tax for road infrastructure go up. So the result is that the local residents are being taxed twice. If that is the realistic result of privatization it is doomed to failure.

Road roughness is not getting worse systemically. In fact roughness, on the interstate and primary systems has decreased over the past 5 years. Similarly, the number of structurally deficient bridges has decreased during this period.

Roads are getting more crowded however. This information is available from the Conditions and Performance report done every year by the Federal Highway Administration

In Russia there is a city north of the Arctic Circle. That city has no other source of contact with the outside world other than by aircraft. Roads don't go here. Trains don't go there. Ships don't go there. The traveller can only get there by flying. When the flights stop---and they will as conditions in Russia continue to deteriorate, the city will be cut off. No way to bring in food. No way to evacuate people. There will be starvation, rioting, and cannibalism. Refugees will set out for other cities, producing waves of desperation, death, and chaos. If Russia has not collapsed by now this would surely do the job.

As to public health and infrastructure. Never forget that an unhealthy population is not able to maintain infrastructure as well as a healthy one. To use Russia as an example, keep in mind that the Russian health system is a ruin, which leads to a grossly unhealthy population, and thus a population that cannot maintain Russia's infrastructure to the extent it needs to be maintain, and which contributes to Russia's catastrophic decline in population. As infrastructure deteriorates the ability to disseminate medical information and medical supplies deteriorates as well. Which leads to further, and swifter, deterioration in health. Which in turn leads to further deterioration in the ability to maintain infrastructure and that leads to ... Well, you get the picture.

Public health is just as vital a part of infrastructure as repair equipment; for if no-one's healthy enough to use that equipment it might as well not exist.

Forgot to note that my comment above was in response to Thompson in the second comment above. The first and most important part of infrastructure is people. For it is people who establish, use, and maintain infrastructure. Forget that and sooner than you think your infrastructure becomes useless toys and gewgaws.

Alan reports: "In Russia there is a city north of the Arctic Circle. That city has no other source of contact with the outside world other than by aircraft. Roads don't go here. Trains don't go there. Ships don't go there. The traveller can only get there by flying."

.......... in my state of Alaska and in NWT we've a lot of similar towns, though few would qualify as a "city". For many of these towns flying in would be the main way to get there. But it seems typical for towns of the Arctic to be built near some sort of river or waterway; for the fishing? or as a means of shipping ore? the town must have some reason for its existence. The alternative transportation is snow machine, trucks on ice roads in the winter or small shallow river craft in the summer.

But you point is well taken, the exorbitant fuel costs are causing many Alaskans to leave their ancestral homes, even though rural fuel costs are subsidized by the state, and move to Fbks or Anchorage or other towns "on the road system".

Alaska is sort of a wealthy "third world nation" and the energy problems of our rural areas causes me to think about the effect of $130 oil on poor third world nations.

DanC You use "high gas taxes" and "high gas prices" seemingly interchangeably. Neither Krauthammer or myself favor crippling high gas prices and the gist of his and my writings are that of the pre-emptive tax policy depressing consumption and putting us in a much better position. First, for those who believe oil is in a "supply and demand" market our lower consumption would lower price.

If not? and the price is jacked up anyway? We're still in a better postion as we'd have learned how to use less oil in our various endeavors.

BTW IF YOU believe in market forces, "the market" is warning your rural folk to learn how to adapt to high oil prices and use less to accomplish whatever they are doing out there. (I pointed out the extreme hardship being dealt to Alaska's rural areas and am sympathetic.)

Lastly, the proceeds of a US based BTU tax would accrue to our Treasury and could be rebated to hardship cases while the high price sent abroad is in their Treasury and is apparently being used to purchase large chunks of America and perhaps to further increase the price by "speculation" in the futures markets.